Traders Rush to Safety in Loan ETFs Again on Interest-Rate Pain

(Bloomberg) — Investors plowed record cash into a pair of leveraged loan ETFs last week, in a high-conviction bet that the Federal Reserve will be slow to slash interest rates.

The nearly $20 billion Janus Henderson AAA CLO ETF (ticker JAAA) saw more than $1.2 billion of inflows last week — the biggest weekly haul since its inception in 2020. The SPDR Blackstone Senior Loan ETF (SRLN), meanwhile, took in more than $600 million, continuing its winning streak of 12 out of 13 weeks.

A prolonged period of elevated rates is a boon for both funds. Leveraged loans have been one of the best-performing credit asset classes last year, handing investors a roughly 9% return, accounting for both price gains and interest payments, according to data compiled by Bloomberg. Since these loans pay floating rates, they generate more income as yields rise.

“The securitized loan space is where investors are piling cash because they are more diversified, safer havens and produce strong yields,” said Mohit Bajaj, director of ETFs at WallachBeth Capital.

The rush comes after Fed Chair Jerome Powell last Wednesday said that officials are not in a rush to lower rates. He added that the central bank is pausing rate cuts until it sees further progress on inflation after it began reducing rates in September. Strong economic growth coupled with a solid labor market allowed policymakers to have a wait-and-see approach, especially amid the uncertainty over how President Donald Trump’s policies on immigration, tariffs and taxes will affect the economy. Futures are pricing in that the central bank will keep rates on hold until mid this year.

Janus Henderson’s JAAA is the biggest ETF tracking collateralized loan obligations with about a 90% share of the market for top-rated CLO ETFs. In general, inflows into ETFs holding CLOs hovered around $3.2 billion in January, the highest monthly inflow on record, according to Bank of America Corp. data. As for the $9 billion SRLN, in particular, retail investors get exposure to a broad array of loans, said Grant Nachman, founder and CIO of Shorecliff Asset Management. 

“Between mostly sitting at the top of the capital structure and delivering floating rate exposure, loans offer both perceived defensiveness plus a way to harvest steady income should interest rates stay stable or increase again,” he added.

John McClain, portfolio manager at Brandywine Global Investment Management, said the trade makes sense but he doesn’t necessarily agree with it. More demand may lead to fundamentally questionable supply at “bad prices,” said McClain, who is reducing his exposure to leveraged loans.

“The current environment is Goldilocks in disguise setup for levered floating rate credit. Rates remain high, the economy grinds and investors are emboldened to take on credit risk,” he said. “We would caution that valuations matter and credit risk will be mispriced quickly.”

–With assistance from Vildana Hajric.

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